Equity & Ownership

Stock Options

Understand stock options — the right to buy shares later at today's price — which give employees leveraged upside if the company grows and limited downside if it doesn't, and whose value hinges on the shares exceeding the strike price.

  • Beginner
  • 15 min total
  • 13 chapters

What decision this helps you make: What a stock option is really worth — understanding the strike, vesting, expiration, and tax that determine it.

What this topic is

A stock option is the right (not obligation) to buy shares at a fixed price (the strike, set at grant). It's the standard way companies give employees equity upside.

Why it matters

It creates leveraged upside with limited downside: if the shares rise above the strike, you buy low and own valuable shares; if they don't, you simply don't exercise and lose nothing. But it's worthless if the shares never exceed the strike — and its features (strike, vesting, expiration, tax) determine its real value.

Who should learn it

Employees offered options, and founders granting them.

What you will understand

  • Understand an option as the right to buy shares at a fixed strike
  • See the leveraged upside with limited downside
  • Know it's worthless if the shares never exceed the strike
  • Understand the features (strike, vesting, expiration, tax)

Prerequisites

Common misconception

"Stock options are just free shares the company gives me." Not quite. A stock option is the right (not obligation) to buy shares later at a fixed price (the strike, set at today's value). If the company grows and shares exceed the strike, you exercise (buy low) and own valuable shares — capturing the gain; if they don't, you simply don't exercise and lose nothing. That's leveraged upside with limited downside — but an option is worthless if the share never exceeds the strike, and its features (strike, vesting, expiration, tax) determine what it's really worth.